Strategy Formulation Using Early Mover Theory and Late Mover Theory

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Part I: Early Mover Theory
The company which produces and sells a new product or service first in the market is called the first mover or pioneer (Hunger & Wheelen, 2010: 200).

According to Hunger and Wheelen (2010: 200), the advantages of First Mover theory are:

1) Company is able to establish a reputation as an industry leader.
2) Company can move down the learning curve to establish itself as a cost leader.
3) By being an early mover, the company can set standards for all subsequent products in the industry.
4) Higher profitability for early movers due to huge initial sales volume and lower costs.
5) Company sets its standards due to which the company is able to retain the customers and is able to offer the future products that attract the same set of customers.

First Mover advantages arise from three sources (Lieberman & Montgomery, 1987: 2):

1) Technological Leadership - which can be attained through the learning curve or experience curve where the company achieves economies of scale through increase in output or can be attained through success in research and development and getting patents.
2) Preemption of Assets - The company identifies the assets which are available at low cost initially, but whose cost of acquisition increases substantially after some time. For example, land in an unexplored area may cost low at the initial stages but when the buildings are erected and townships are developed the prices of the land may increase in that area.
3) Buyer's switching costs - will be high for the other players who enter the industry at a later stage as they have to invest substantially in other resources to attract the buyers from the competitors.

Late Mover Theory:
According to Hunger and Wheelen (2010: 201), the advantages of late mover could be the disadvantages of First Mover theory which are as follows:

1) The company may have to incur high costs of R&D which the late movers can keep at a lower level.
2) If the product is not successful in the market, the late movers may take the advantage and bring new products with improvements.
3) Rapid Technological Advancement may lead to fast obsolescence of the products.
4) First movers have natural inclination to ignore certain market segments.

Lieberman & Montgomery (1987) have described the Late Mover Advantages as follows:

1) Ability of the later movers to free-ride on investments of early movers as the infrastructure is already well developed, buyer is already knowing about the product and the technology has already been developed as a result of R&D by ...